OPEC Extends Its Current Ceiling on Production in a Win for Moderates

Gulf moderates, led by Saudi Arabia again, prevailed at the midyear OPEC meeting Tuesday as the divided cartel swept most of its problems under the rug and approved a status-quo agreement on oil production.

The cartel could only manage that with some vintage OPEC sleight of hand when the United Arab Emirates signed the agreement but disavowed its assigned quota.

Though the outcome was expected, the effect on oil prices in coming months is a matter of dispute. Most experts see no dramatic change for consumers, however.

The agreement extends to Dec. 31 the production ceiling of about 15.1 million barrels per day for 12 of the 13 members of the Organization of Petroleum Exporting Countries, including the UAE. Iraq again refused to sign and is producing flat out, a major reason for the quota system’s ineffectiveness in recent months.

The agreement also continues the cartel’s “official” average price of $18 per barrel, though in practice the fixed-price system was abandoned months ago and $18 remains a distant target.

Cheating by several OPEC members and rising production by other oil nations have prolonged a world oil glut. After last year’s success in boosting prices to near its $18-per-barrel benchmark, the cartel has been unable to prevent a slide to the $14-$17 range.

New Blow to Credibility

On the New York Mercantile Exchange Tuesday, the July contract for West Texas Intermediate, the U.S. benchmark crude oil, rose 40 cents to settle at $16.83 per 42-gallon barrel. The contract had dropped 90 cents over the preceding three sessions.

The price fetched by West Texas Intermediate is normally about $2 higher than that commanded by the Arab grades of crude that are supposed to sell at the official price.

The failure to return Iraq to the quota system was the cartel’s chief disappointment. But the sudden left turn by the UAE’s temperamental oil minister Mana Saeed Oteiba, who is now rejecting the quota assigned to him, seems a new blow to OPEC’s credibility.

Oteiba, who has long been criticized by other ministers for his country’s chronic cheating on its production quota, stormed out of the meeting Sunday and fumed that the UAE’s quota of 948,000 barrels a day was unfair. The UAE, unable to control oil production in the seven independent-minded sheikdoms that make up the country, has long been OPEC’s most notorious cheater. It is currently producing some 400,000 barrels above its quota.

Asked Tuesday night whether he would abide by the 948,000-barrel quota under the accord he had just signed, Oteiba said: “That is our allocated quota, but it is not necessarily our official quota. When we can help OPEC by lowering production, we will continue to do so. But 948,000 is not our official quota.”

An aide said Oteiba meant that the Emirates would continue producing the amount of oil it has been--cheating, in other words--and that “he will show restraint and not open up the taps.”

OPEC president Rilwanu Lukman of Nigeria said this was news to him, declaring, “He has a production ceiling which he said he was going to abide by. He signed an agreement and we are going to hold him to it.”

OPEC also failed to respond to a mutual production-cutting offer by six non-OPEC nations and was unable to settle numerous technical arguments about oil production that have bedeviled the cartel.

‘Interested in Cooperation’

A committee was named to deal with the technical disputes. The non-OPEC nations made clear, meanwhile, that their offer remains on the table in principle. The Mexico-led group offered in April to cut production by 5% if OPEC would do the same thing.

“We have clearly indicated this was not a one-shot deal. We continue to be interested in cooperation,” said Herman Franssen, oil adviser to the government of Oman, one of the key non-OPEC nations.

But the OPEC members--with the Saudis, Kuwait, Qatar and the UAE united against the others--were so far apart on this and other issues that they chose to cut their losses and go home on the fourth day of the meeting.

The decision to roll over the existing agreement was a victory for the Saudi-led minority, which flatly opposed the production cuts favored by the other nations. The issues and outcome were similar to those at a special April meeting held to consider the offer of cooperation from six non-OPEC nations.

The two sides are divided by differences in the size of their oil reserves and in their needs for oil revenue. But, as with outside economists, they also disagree on how much OPEC oil the world will need over the next six months. The greater the demand, the higher the price, assuming production is unchanged.

Expected Demand

Saudi oil minister Hisham Nazer claimed Tuesday that production should be boosted, not cut, because of the “robust demand” for oil. But a growing number of analysts say the demand outlook isn’t as bright as it seemed in the spring because of OPEC’s overproduction and growing stockpiles of crude oil.

“We’re cautious. It’s clear that at least some of that strong demand earlier this year went into inventories,” said Paul Tempest, a London-based executive of Royal Dutch Shell.

Lukman said OPEC expects the world to need 18.7 million barrels a day of the cartel’s oil in the third quarter and 19.3 million in the fourth quarter. Oman’s Franssen said that is 1 million barrels too high, but chief economist Jack Wilkinson of Sun Oil Co. said Lukman was “bloody right on.”

The ministers also elected Subroto, the former oil minister from Indonesia, to fill the long-vacant post of secretary general at OPEC’s headquarters. The job as head of the cartel’s bureaucracy here has been filled on an acting basis since 1983.

The position is expected to become more important under the well-liked and respected Subroto, who was an influential mediator among the ministers until being replaced back home earlier this year.